Revolution and Market Cycles

In the aftermath of the credit crisis, real estate deflation and stock market
correction, there has been a startling rise in the talk of revolution among
many Internet chat rooms and message boards.

This is no idle chit-chat, mind you. It's part of a serious discussion
about the alarming possibility of a militant uprising should the economic situation
deteriorate further. "Typical bombast from the lunatic fringe," is
how some have responded to the sudden appearance of revolutionary furor. In
view of the market cycles, however, the longer-term implications behind this
kind of talk can't be so easily dismissed.

Right away there are two inferences that can be made here. The first
is that the liberal use of the word "revolution" is commonly heard
only at major financial market and economic bottoms. History shows that
most actual revolutions were made following major financial debacles or economic
depressions. Indeed, revolution in most instances is a consequence of
the long-term Kress cycle bottoms.

It comes as no surprise then that following four years of a tight money economy
in the U.S. (thank you Alan Greenspan!), the point of maximum recognition has
been made this year by the mainstream media and the average consumer/investor. The
greatest recognition and hand-wringing over a weak economy always occurs at
or very near the end of an economic decline. So if we assume the worst
of the economic weakness is behind us, it makes perfect sense that talk of
revolution has become prevalent along the so-called "fringes" of
the socio-economic spectrum.

Further, that the U.S. stock market is currently undergoing a major bottoming
process after the debacle earlier this year is obvious based on the internal
indicators. To show you what I'm referring to, let's look
at the dominant long-term internal momentum indicator known as HILMO. HILMO
stands for Hi-Lo Momentum and measures the rate of change in the number of
stocks making new highs minus new lows. The hi-lo rate of change is one
of the best means of quantifying the last incremental demand for stocks.

The above chart shows the 200-day rate of change in the net number of new
highs on the NYSE. Notice that a few weeks before the stock market put
in its final high for 2007 back in October last year, the 200-day HILMO indicator
had already topped out in June-July and was in the process of rolling over. Whenever
200-day HILMO is falling and enters negative territory, the market becomes
abnormally vulnerable to negative news. Major price shocks become more
common.

The 200-day HILMO indicator stayed down through most of this year until last
month, when it joined the short- and intermediate-term internal momentum indicators
in turning up. The former indicators had already been up since March. With
the improvement in 200-day HILMO, this shows that the long-term internal momentum
has reversed upward and the market will be less vulnerable to being "torpedoed" by
bad news over the credit crisis, oil crisis, et al, like it was in late 2007
and early 2008.

The current revolutionary fervor can be safely viewed through the contrarian
lens, meaning that its implications are non-threatening in nature and signify
that the worst of the economic and financial debacles of the past year are
likely behind us. This conclusion also fits in with the upcoming 6-year
cycle bottom, plus the fact that the 10-year cycle doesn't peak until
later 2009. That means the bull market which began in 2003 should have
at least one more year to run before cyclical and secular forces combine to
create more turmoil for the market and the economy.

Now let's look at the longer-term implication of the revolutionary talk. While
the discussion of revolution around the interim bottoming process this spring
has been somewhat innocuous, it does reflect a change in attitude that has
been building for some time. The past decade has witnessed a shift of
fortunes whereby the many, namely the public, have become increasingly burdened
by higher taxes (fuel, food and housing costs). At the same time the
few, namely the super rich, have aggrandized their wealth and political power. Multinationals
have increased their reach at the expense of smaller enterprises and a growing
number of Americans have been pushed to the margins of the global economy. This
has only served to fuel their suspicion and disenchantment of the aristocracy
of the few.

This analysis doesn't even begin to take into account the long-term
disenfranchisement of those on the lower end of the socio-economic scale. Taking
a tour of any of the "bad parts" of the large inner cities throughout
the nation gives one an idea of the sociological trouble brewing beneath the
surface.

Since the long-term Kress cycles serve as the lens through which we're
making this examination, it's only fitting that we use Mr. Kress's
definition of revolution:

Revolution = radical change in lifestyles

The bottoming of the 120-year Master Cycle always brings about revolution. The
first revolution since the founding of our nation in the 1770s was political
in nature. The second revolution, when the last 120-year cycle bottomed
in the 1890s, was industrial. The third revolution when the current
120-year cycle bottoms next decade will probably be a social one. As
Kress has stated concerning the final "hard down" phase of his
120-year cycle, "There's the potential for Big Brotherism to get
worse and we'll probably see the U.S. becoming more socialistic as our
standard of living deteriorates."

As the 120-year cycle bottoms in 2014, so does its 60-year cycle half component.
The 60-year Kress cycle sometimes (though not always) coincides with K-wave
bottoms and is known as the market Super Cycle. The last time the 60-year
cycle bottomed was in 1954, at which time the 120-year cycle peaked. This
saw the peak of America's industrial prowess and shortly thereafter our
industrial base began its long decline.

Since the founding of our nation in 1776, there will have been four 60-year
cycle bottoms by the time 2014 rolls around. As the number four represents
completeness, Kress concludes that at the fourth Super Cycle bottom in 2014
the U.S. will have completed its journey from birth to death as the world's
leading nation. Kress predicts the U.S. will be replaced as the dominant
economic superpower in 2014 when the 120-year cycle bottoms.

Will the coming economic shift in 2010-2014 produce a social revolution? Remember
that revolution is also essentially an economic expression. It has at
its root the money motive. Dr. Stuart Crane has said, "As long
as the cost of resistance is greater than the cost of compliance, people will
remain docile and will submit to a tyrannous government. But whenever
the cost of compliance exceeds the cost of revolution, a revolution will be
the inevitable choice."

That is, when it costs the average citizen more in dollar terms to pay the
taxes [food, fuel and housing costs] demanded by the State than it does to
resist, the masses at some point are forced by economic necessity to say, "No
more!" This is how revolution begins.

Beginning sometime around the tumultuous decade ahead in 2011-12, the final "hard
down" phase of the 60-year and 120-year cycles will begin and with it
will likely come the beginnings of social/political revolution. Remember
the Kress formula that revolution equals a radical change in lifestyles. It
will be important to plan for this dramatic shift in our nation's standard
of living coming up in a few years. Your financial destiny depends on
it!

Clif Droke is a recognized authority on moving averages and internal
momentum. He is the editor of the Momentum Strategies Report newsletter,
published since 1997. He has also authored numerous books covering the fields
of economics and financial market analysis. His latest book is Mastering
Moving Averages. For more information visit www.clifdroke.com